Rio Tinto defies commodity rout with big payout

Global miner Rio Tinto handed $2 billion in capital to shareholders on top of a higher than expected dividend on Thursday, despite reporting its worst half-year profit in two years.

The bumper return came after the world second largest miner cut costs, capital spending and debt to shore up its cash flows against collapsing commodity prices, with the steepest slide in its biggest business, iron ore.

The biggest surprise was Rio managed to cut net debt to $12.5 billion, sharply below forecasts, and flagged it would cut capital spending in 2015 to less than $7 billion, instead of $8 billion, both factors that will give it flexibility to continue returning cash to shareholders.

Rio Tinto chief executive Sam Walsh, under pressure to please investors to ward off a renewed takeover approach from rival Glencore, said he was confident the company would continue to generate sustainable returns for shareholders.

“2015 will be a tough year for the industry, but we are ready to respond to any such conditions,” Mr Walsh told reporters on a conference call from London.

“The strong balance sheet is a key competitive advantage, providing a wide range of options in the future regardless of market conditions,” he said.

Underlying earnings for the six months to December 31st fell 30 per cent to $4.19 billion from a year earlier.

Annual iron ore earnings fell 18 per cent, but were stronger than expected. The world’s lowest cost producer ramped up output flooding the market and driving down its average prices for the year by 30 per cent, which forced higher cost producers to cut volumes.

Rio increased its full year dividend by 12 per cent to $2.15, which was higher than the $2.12 the market was expecting.

It said it would return $2 billion through a buyback of its Australian and UK-listed shares, which was in line with what analysts had expected.

Profit from Rio’s long-suffering aluminium division more than doubled in 2014 to $1.2 billion, overtaking copper as the group’s second-biggest earner.

SHARES RALLY

"It's a pretty strong set of results, and they're giving the market what they're wanting. It should be really well received," said Ric Ronge, a portfolio manager at Pengana Capital.

Rio’s UK-listed shares jumped 1.8 per cent in early trade.

The Anglo Australian miner is the only one of the world’s big five miners in a position to return capital at this point, after Glencore made a $1 billion return last August.

Mr Walsh and chief financial officer Chris Lynch did not make any promises about further buybacks a year from now, but said the company should have enough flexibility to consider one.

“The strength in the balance sheet enables us to have capacity to have a look at further returns to shareholders on an ongoing basis going forward,” Mr Lynch, speaking from Melbourne, told reporters.

Arch rival BHP Billiton has taken similar steps to shore up cash flows against sliding iron ore, copper and coal prices, but the world's biggest miner, which also has an oil and gas business, has had to put off any plan to return capital following a halving of oil prices since June.

Rio Tinto’s Australian shares have fallen 10.3 per cent over the past year against a 9.8 per cent rise in the broader market, but have outperformed BHP.

Anglo American, the smallest of the top five global miners, is due to report its annual results on Friday.

Reuters